ANALYSIS-Facebook stock's bad start reins in short sellers

NEW YORK, June 19 (Reuters) - Facebook's weak stock marketdebut has a potential silver lining for the social media giant -some short sellers may have been scared off.

About 8.1 percent of the 421 million shares in the initialpublic offering were sold short as of May 31, about two weeksafter its trading debut, according to a Reuters analysis ofexchange data.

That percentage is lower than for Pandora Media Inc,LinkedIn Corp, Angie's List Inc and GrouponInc - half of the other Internet companies that wentpublic in the past year. And Google Inc, with whichFacebook is often compared, attracted a much higher shortinterest in the first couple of weeks after its IPO in 2004.

Short sellers borrow stock and then sell it, betting that itwill decline in value and that they can then buy it back morecheaply.

Facebook had a tough first few weeks of trading. Its debutwas marred by technical glitches on Nasdaq and reports thatanalysts at top underwriters reduced their revenue and earningsforecasts only days before the offering. Its shares rose only 23cents on opening day and in subsequent days fell as low as$25.52, 33 percent below the $38 offer price.

But short sellers, after initially sensing a chance toprofit from negative market sentiment and Facebook's richvaluation, may have backed off as the shares plunged.

"The opportunity to make money on short selling is greatestwhen a stock is overvalued," said Jay Ritter, a University ofFlorida IPO expert who reviewed Reuters' analysis. When theprice falls, it signals "time to take profits" because "thepossibility of a further decline becomes smaller."

Among the companies that were more heavily shorted,LinkedIn's shares soared as much as 173 percent above theiroffer price on their first day; Groupon, 56 percent; PandoraMedia, 62 percent; and Angie's List, 44 percent.

Facebook's stock price gain in the first few minutes oftrading was limited to 18 percent before the decline set in.

DOESN'T MAKE SENSE

Steve Spencer began shorting Facebook at $32 per share theTuesday after the public offering, but has since stopped.Indeed, Facebook's shares have recovered in the past two weeksto trade around $32 on Tuesday.

"The risk/reward doesn't make sense to me right now," saidSpencer, who co-heads SMB Capital, a proprietary trading shop inNew York. "If people wanted to make a bet on the short side,they were doing it in the mid-30s."

To be sure, in terms of the raw number of shares shorted,Facebook's initial short bets in the first two weeks of tradingare bigger than those of any Internet company listing in thepast year.

More than 34 million shares were sold short as of May 31,the latest date for which the data is available. But the figureis not surprising, given the size of Facebook's offering.

Some small investors have kept their Facebook shares, hopingthey will bounce back.

"I didn't think it would do this badly," said Tony Allen, aDetroit real estate entrepreneur who bought 50 shares on the dayof the offering at $42 and has watched his investment sink invalue. He said he was holding on in the hopes of a "turnaround."

A Facebook spokesman declined to comment.

SHORTING COST SOARS

Initially, short sellers' demand for Facebook shares was sohigh it forced another barometer of bearish investor activity toskyrocket. The annual interest rate charged on the value ofborrowed Facebook shares soared to more than 40 percentinitially, said David Lewis, senior vice president at AstecAnalytics, which tracks stock borrowing costs.

"Anything over 1 percent you consider to be quite special,and this was 40 percent," Lewis said. The interest rate hasfallen quickly since and is now at around 0.6 percent,indicating a lot more stock is available for borrowing.

Reuters gauged the degree of shorting activity for stocklistings similar to Facebook by calculating the percentage oftheir publicly listed shares that had been sold short followingtheir IPO. Reuters' data comes from the stock exchanges, whichpublish short interest reports every two weeks, or for olderlistings, every month. Reports closest to IPO date were used forthe analysis.

It is unclear what the short interest says about the stock'slong-term prospects. "Outside of IPOs, almost all of theresearch indicates that short selling is a negative signal,"said Ben Blau, a finance professor at Utah State University.

But IPOs are harder to call. Not every company that attractsa high degree of bearish investor sentiment ends up performingpoorly.

For example, search engine Google attracted short bets thatamounted to about 21 percent of its publicly listed sharesshortly after its August 2004 offering - nearly triple that ofFacebook. Yet from the beginning, Google defied the shorts:Priced at $85, its shares opened at $100, doubled by January2005 and closed above $300 six months later - a level they haverarely breached since then. Google's stock was trading onTuesday at around $582.

During the dotcom boom in the late 1990s, many stocks hadhigher early short interest levels than Facebook. They includecompanies that went on to thrive, like eBay Inc, aswell as some that collapsed, such as Pets.com.

BORROWING INCREASE

The latest data from Astec opens up the possibility thatshort investors may have increased their negative bets onFacebook.

Astec estimates there are currently about 52.1 millionFacebook shares on loan. That is up from 34.3 million on May 31,about the same as the shares reported short as of that date. Ifmost of the shares now on loan are again shorted, it wouldindicate that Facebook's short interest could be as high as 12.4percent.